Understanding how banks can leverage Web3 Technologies for success

Understanding how banks can leverage Web3 Technologies for success

Built on a base of collaborative technologies, Web3 is set to revolutionize the banking ecosystem. Adrian Toynton, Head of Banking Solutions, APAC, FIS, outlines how banks, fintechs and regulators can work together.

The potential of Web3 technologies presents a compelling opportunity for Australian banks and financial services to explore.

These emerging technologies are expected to have a lasting impact and potentially offer transformational possibilities.

So, what is Web3 and what impact can this technology have?

While there’s plenty of information about Web3 out there, there’s also considerable confusion about what it means.

The definitions of the term may vary but it is understood that Web3 focuses on decentralisation (supporting decentralized finance i.e. DeFi), distributed ledger technologies (such as Blockchain) and tokens (which can generate smart contracts).

All of these have enormous potential within financial services. 

Essentially, Web3 envisions the Web as a diverse array of digital offerings and services that is facilitated by a decentralized infrastructure.

This framework enables greater trust and privacy since a decentralized infrastructure gives participants ownership of their data while ensuring that their data is immutable and impervious to alterations.

Through Web3, transactions such as payments are permanently recorded, ensuring that everyone receives a real-time update of market developments.

Trends to Watch

Survey findings confirm that banks are investing in utilizing Web3 as a way to enhance innovation and efficiency.

Nearly two-thirds (60%) of executives predict that Web3 will disrupt traditional banking models, with the survey highlighting how banks are well-positioned to seize new opportunities based on their track record of regulatory compliance, KYC abilities, strong risk management and the rapport they have with existing customers.

DeFi also generated some of the strongest feelings from surveyors.

According to FIS’ Global Innovation Report, some 50% of financial services firms in Australia believe DeFi represents a major growth opportunity for their organization.

 A Closer Look at Web3 Opportunities for Banks

Web3 and DeFi are closely intertwined and with the right strategy, banks can drive innovations by leveraging both. Even banks that aren’t as technologically advanced can quickly realize some benefits.

A Blockchain is used to authenticate users, validate transactions and maintain an unaltered record of digital information. This method helps to bolster identity and transaction authentication across a broad range of financial services.

The advantages of Blockchain include streamlining banking and lending services, reducing fraud in payments and decreasing issuance and settlement times in trading.

•        Accelerating the settlement process. The finance industry has struggled to keep pace with the 24/7 world. While real-time transactions have become commonplace, many payments can still take days to settle. With Web3, settlement can happen instantaneously for both domestic payments and foreign currency remittances, leading to reduced transaction and settlement fees.

•        Efficient, precise credit reporting. Web3 enables immutable credit histories to be built quickly through Blockchain. While this is an advantage for banks, it is particularly beneficial for the customers whose financial well-being is often hindered by a lack of credit history. Blockchain can serve as a gateway to automate the credit lending and borrowing process, and overall reduce costs for lenders and borrowers alike.

•        Enhanced compliance at lower costs: Blockchains can facilitate compliance through its transparency and immutability offerings. Documents that must be disclosed to regulators are always available on the Blockchain, streamlining and automating compliance to a level that was previously impossible.  

•        Liquidity management. Complexity presents a ubiquitous challenge within the banking sector, especially when it comes to liquid management. All liquidity managers are tasked with analyzing and managing a multitude of accounts in real time to assess risk and manage liquidity. Through the implementation of distributed ledgers, banks can acquire a comprehensive view of all bank accounts to manage intraday liquidity with precision. This real-time understanding of funding requirements empowers banks to minimize liquidity exposure and liquidity buffer requirements. Distributed ledgers also facilitate real-time settlement, which improves efficiency and allows money market transactions to be completed with greater certainty.

•        New bond issuance. Blockchain has become a gamechanger for banks to issue bonds. Traditionally, new bonds entailed tedious paperwork, with long settlement delays and post-issuance ambiguities. The use of smart contracts revolutionized bond issuance by eliminating manual processes and effecting same-day settlement. Furthermore, Blockchain technology democratises bond issuance, making it more accessible and affordable for smaller companies. In Singapore, DBS Bank launched its first security token offering by issuing a digital bond, offering an innovative and efficient way to raise capital in APAC.

•        Digital assets. These assets play a crucial role in the DeFi world. Blockchain technology enables the creation of a multitude of digital assets, such as fungible cryptocurrencies, stablecoins and non-fungible tokens (NFTs). We are already seeing Australian banks such as NAB and ANZ take the leap into stablecoin development, both looking to create a digital representation of a bank deposit to allow corporate customers to use Australian dollars for Blockchain-based transactions.

As shown by the above examples, Web3 is set to revolutionize the banking ecosystem in due course, bringing forward significant innovations that will reshape the nature of finance. With Web3 built on the base of collaborative technologies, banks, fintechs and the regulators that work together can benefit in the long run.

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